A cautious cut from the Russian central bank

The Russian central bank cut interest rates by 25 basis points to 7.25%, in line with expectations. The overall tone of the accompanying statement was cautious, but still pointed to one further rate cut before a transition to neutral policy in early 2020.

This is in line with our expectations for rates to fall to 7% this year and then remain on hold throughout 2020.

Inflation continues to decline in Russia, as in much of the world, aided by currency appreciation and lower food prices. The central bank’s own forecast sees inflation falling further from 4.7% presently to 4% in early 2020.

A more dovish stance is precluded by concerns over inflation expectations; household expectations of future inflation remain elevated and there is some worry that they could become unanchored if geopolitical developments drive greater volatility in commodity prices and currencies.

The central bank also highlighted that fiscal policy should switch from contractionary to expansionary in the second half of this year, generating some inflationary pressure.

Overall though, growth is not strong enough at present to generate real fears of inflation. Investment, exports and consumption are all struggling, despite record low unemployment.

Our own forecast for growth sees only a modest pick-up in activity in 2020, with inflation heading lower in part as base effects from tax increases drop out. We concur with the central bank’s assessment and continue to expect one further rate cut before the easing cycle ends.